Those who analyze political institutions often employ broad labels. They refer to democracy
or authoritarianism; presidential or parliamentary governments; or to systems of plurality or
proportional representation. In this paper, I refrain from addressing politics at this level and adopt
an approach that is far more micro in perspective. The approach I take can be referred to as
"neo-classical," with the attributes that the name implies: rationality in choice, an
emphasis on the individual decision maker, and an explicit treatment of the process by which
individual actions aggregate into collective--in this case, policy--outcomes.

Several considerations underlie the adoption of this approach to the analysis of institutions. It
is often difficult to reason from the macro-level attributes of political institutions to the content
of
public policies. Are, for example, democracies more likely to adopt liberal economic policies
than
are authoritarian regimes? There are few ways to achieve purchase on this issue, with the result
that multiple lines of argument can--and have been--advanced on both sides.1 Where such arguments are persuasive, it is often because they
appeal
to micro-level properties of the political structures. By micro-level features, I refer to the identity
of the agenda setter, gatekeepers, and veto players--players whose powers are created by the
structure of institutions and the rules that they embody

It should be noted that an implication of this approach is that there is no reason to expect a
particular kind of government to be "best," when rated in terms of expected choice of
policies. Rather than the institution itself, it is the structure that it imposes upon the process of
decision-making and the incentives that it generates for decision makers that shape policy
outcomes. Two parliamentary, while formally similar, can differ in terms of these properties, and
so generate different policies. By the same token, a presidential system and a parliamentary
system
can generate similar economic policies, in so far, say, as those who demand low rates of inflation
occupy veto points in each system.

The contribution of this paper, then, will not be prescriptive; it will not call for the adoption
of one kind of institution as opposed to another. Rather, it will be methodological. The forms of
analysis that it advances can be applied widely and employed to discern the policy bias that
inheres
in a particular institutional setting.

Traditional Approaches: The Neo-Classical
Alternative

Policy analysts often view governments as unitary actors with coherent sets of objectives, which
then choose policies in order to facilitate the attainment of those objectives. Some states are
considered "developmental" and others "predatory," for example, and
their policies explained accordingly.2 Or policy choices
are
attributed to the preferences of a collective group: the president and his inner circle,
"rent-seekers," or "the technocrats."3 Either for good or ill, policymaking is thus viewed as the rational
selection of means for attaining outcomes.

But policies rarely result from the deliberations of a single entity; rather, they emerge rather
from competitive political processes, in which diverse interests advance competing alternatives,
resulting either in the victory of one or a compromise among several. Even totalitarian states, we
have learned, possess internal political conflicts; they contain internal "empires" and
competing bureaucracies, both economic and political, each with its own special
interests.4 And where governments are subject to the
dictates of a single party, we often find, upon inspection, that the party is rife with internal
conflict
among competing political factions.5

A neo-classical perspective encourages us to abandon the unitary actor mode of explication.
It drives us to the micro-level. It encourages us to attempt to account for collective outcomes as
the result of political competition. It therefore draws our attention to the internal political
processes that underlie the formation of policy. And it gives us the tools by which to account for
the way in which policy choices emerge as outcomes from a competitive political process.

To illuminate this framework, I apply it to the decision to form capital and, in particular, the
decision to make investments that are irreversible at great cost.

The Analysis of Politics and the Problem of
Politics

The best way in which to introduce the approach is through an example. In the illustration
below, Figure 1, there are two dimensions of public policy. One
focuses on the provision of social services; the other on military preparedness. A point in the
surface defined by the two policy dimensions represents a combination of the two policy outputs.
We assume that there are three decision makers, whom we label A, B, and C, and that they
possess policy preferences. Using a
spatial framework, we can order the possible policy combinations in accord with the actors'
preferences. The "ideal" or "bliss" point for each appears as a point
bearing the actor's identifying label; this point represents the actor's most preferred combination
of social services and military preparedness. The further a combination of the to policies from an
actor's ideal point, the lower the utility she derives. Points of equal loss appear as indifference
curves; these lie equidistant from the ideal point. Points lying between a given indifference curve
and ideal point lie closer to that actor's bliss point, and are therefore preferred to any point on the
curve.

A moment's consideration reveals that the triangle formed by the three ideal points
constitutes
the set of policies that are efficient. Within the triangle (and including its borders), no change in
policy can make any actor better off (i.e. move the policy choice closer to one actor's ideal point)
without making another actor worse off (i.e. without moving the policy outcome further away
from the ideal point of another). The triangle thus defines the Pareto set. Socially rational policy
choices should therefore fall within this triangle. It should contain the outcomes produced by
"good policy."

The Impact of Institutions

Should collective decisions be made in the context of market institutions, then we know where
the
outcome would lie. By the fundamental theorems of welfare economics, were the three
individual's preferences aggregated into collective outcomes by competitive markets, then the
policy choices would fall within the triangle, or Pareto set.

The same is not true for the outcomes of decisions made in the context of political
institutions, however. Consider the point marked SQ, for status quo. When the indifference
curves
for the actors are drawn through it, they form three "preferred to" sets, one for each
actor; each consists of all the points lying closer to the ideal point than does the status quo. And
now introduce a political rule for choice making. By majority rule, when two out of three of the
actors prefer a policy combination to the status quo, then that choice would replace the status
quo. In Figure 1, the intersection of the "preferred to" sets form sets that are shaped
like petals. By majority rule, any point in these petals would over turn the status quo by
majority rule.

Several implications follow. Note that elements in the sets of points majority preferred to the
status quo include points that fall outside of the triangle, i.e. outside the Pareto set. The political
outcome is therefore likely to be inefficient. Note also that not only is the set of outcomes in the
petals large, but also, the elements in the set cannot be ordered. Political outcomes, then, are
likely to be indeterminate as well.

To illustrate, consider points 1,2, and 3, in the diagram above (Figure 1). Each is majority
preferred to the status quo. Ordering them in terms of their distance from his ideal point, the
actors would rate them in the order recorded in Table 1.

Table 1: Individual Preference Orderings By

A

B

C

Most Preferred

2

3

1

1

2

3

Least Preferred

3

1

2

In an effort to choose a policy, the three decision makers would vote. But the results of the
vote would be indeterminate.

To see this, note that:

2 is socially preferred to 1:

A and B prefer 2 to 1.
Only C prefers 1 to 2.
By majority rule, then, 2>1.

3 is socially preferred to 2:

B and C prefer 3 to 2.
Only A prefers 2 to 3.
By majority rule, then, 3>2.

But 1 is preferred to 3:

A and C prefer 1 to 3.
Only B prefers 3 to 1.
By majority rule, then, 1>3.

The overall, or social ordering, therefore runs as in Table 2:

Table 2: Collective Preference Ordering

1

3

2

1

The polity is thus unable to define its best interests. Instead, it achieves an ordering that
cycles, with alternatives that are least preferred rising to the top (as in the instance of alternative
1
in Table 2) and those defeated in earlier votes being selected at later points in the deliberations.

Given the large number of points that lie in the "petals," there are thus a large
number of possible alternatives that will be preferred to the status quo. And the polity is liable to
cycle indeterminately among such points; it is unable to rank them in an orderly fashion. Political
outcomes are thus highly indeterminate and the policy environment unstable. We have assumed
that the individuals are rational; but, choosing as rational individuals, they would behave in ways
that are socially irrational.

Consider, then, the problem faced by an investor. In particular, consider the problem faced
by
an investor who seeks to form fixed and specific capital, i.e. to invest in a project, a plant, or a
facility that is of value in one site or in one use only. Being specialized, the investment lacks
much
by way of value in its next best use. The investor is therefore vulnerable.

To sharpen the point further, assume as well that the returns to this investment depend upon
the choices of policy. They may depend upon the rules defining costs and what therefore the
revenue department will define as taxable profits; policies toward the exchange rate, the
convertibility of the currency, and the remission of profits; and the regulations governing the
hiring, the termination, and the remuneration of labor. The investor therefore incurs risks, some
arising from the nature of the investment and others from the impact of public policies.

When confronted with the indeterminacy of policy choices, as suggested by this example, the
investor's best response may be to choose to refrain from investing. She may instead chose to
keep her options open and to postpone launching projects that would be costly to abandon.

The Impact of Structures and
Procedures

The illustration thus highlights the economic dangers of political life. It also suggests
possible
corrections. One source of stability is the imposition of further restrictions on the process of
choice. Put another way, it is the creation of structures and procedures, which can sometimes be
called institutions.

To illustrate, return once again to the points labeled 1, 2, and 3. As shown in Table 2, left
solely to majority rule, these alternatives cannot be coherently ordered, resulting in political
instability. But the illustration also suggests that in such situations the outcome that is achieved
depends upon the procedures that are adopted in the making of collective decisions. It therefore
suggests ways of achieving stability, and offers insights into the origins of institutional bias.

Table 3 depicts three possible agendas for choosing among the three alternatives. In the first,
policy 1 is offered as an alternative to policy 2, and the winner then paired against 3. Point 2 lies
closer to the ideal points of A and B than does point 1, and so 2 wins in the first round; point 3
lies closer to the ideal points of B and C than does point 2, and therefore defeats 2 in the second.
The agenda - 1 vs. 2, and the winner vs. 3 - thus yields policy 3 as the choice for society.

Table 3: Agendas and Outcomes

Agenda

First:

Then:

Outcome

Winning Coalition

I

1 vs. 2

Winner vs. 3

3

B and C

II

2 vs. 3

Winner vs. 1

1

A and C

III

1 vs. 3

Winner vs. 2

2

A and B

The procedure thus reduces the multitude of possible outcomes to one that is unique.
Outcomes that were unpredictable thus become determinate. In an environment that hitherto has
been unstable, the existence of an equilibrium can thus be structurally induced.6 Structures thus make possible predictable outcomes. Note
moreover, rows two and three, which depict alternative agendas. They illustrate that even in the
presence of the same structure of preferences, different agendas yield different
outcomes. They therefore illustrate as well that political procedures are not neutral; they
privilege the fate of some policy options over others. In so doing, they instill systematic patterns
of bias in polities.7

Structures and procedures therefore produce determinacy in political life. Insofar as they
determine the agenda by which outcomes are chosen, they create equilibria in situations, such as
those governed by majority rule, where they may previously have not existed. They help us as
well
to institutionalize a pattern of bias in the polity, yielding a systematic preference for particular
kinds of outcomes.

From Structures to Institutions

The structure and procedures that govern political life thus affect the content of policies.
Insofar as this is true, however, then we should expect sophisticated actors to seek t alter the
political structures to their advantage. Insofar as there is stability in policy, them, it is because
people do not opportunistically modify the procedures that govern the policy process. What
accounts for such stability? Put another way, when do structures become institutions?8

The answer most commonly given is: When actors fear to deviate from the rules. When they
fear doing so, then the rules become self-enforcing and the structures will remain in place; they
will become institutionalized. That answer, however, only gives rise to further questions, the
most
obvious of which is: under what conditions will deviations be penalized?

To answer this question, we need to anchor our response in a particular setting. By way of
illustration, I choose the case of the coffee industry in Colombia, focusing in particular on policy
toward exports. The industrial structure of Colombia's coffee sector resembles that of many
nations in Africa; it contains a plurality of small-scale farmers. Yet, since the mid-1930's, the
coffee sector has been, by and large, subject to policies that would be the envy of growers
anywhere. The government of Colombia has tended to provide coffee exporters with a highly
favorable set of economic policies: an exchange rate that closely approximates the market rate,
low levels of inflation, and taxes that, when imposed, are then placed in funds controlled by the
industry. In the making of export policy, the government of Colombia thus exhibits a policy bias
in favor of the coffee industry. The policies have tended to be stable and predictable. The
commitment to the coffee industry appears institutionalized. Why? And why, in particular, given
the contrast in the way peasant producers have been treated elsewhere in the world?

The origins of the commitment appear to lie in the structure of Colombia's institutions. These
institutions confer power upon coffee growers, insuring that policy makers will take their
interests
into account. To deviate from pledges to safeguard the interests of coffee growers would be to
incur political losses, thus rendering pledges credible to the industry.

This analysis is based upon an understanding of the structure of political competition in
Colombia. The issues that defined the rivalry between the two great parties--the sanctity of
property rights, the power of organized labor, and the position of the church--sufficiently
correlate that they form a single policy dimension. We can therefore apply the form of spatial
reasoning developed above, but in this instance, to a one dimensional issue space. Within the
structure of politics defined by these issues, the coffee-growing regions lay at the political
midpoint. To secure a political majority, i.e. to secure more than a half of the votes of the
electorate, those ambitious for power at the national level then had to bid for the support of the
coffee growers; should they fail to capture political support from the mid-point of the electorate,
they would then fail to secure the majority needed to prevail in the competition for office. Both
the Conservatives on the right and the Liberals from the left therefore propounded
"pro-coffee" policies. No aspirant for national office could afford to deviate form this
position, thus rendering the favorable treatment of Colombia's small farmers an institutionalized
component of the policy regime.9 The incentives created
by political structures therefore rendered the government's policy pledges credible. It was in the
interests of those who aspired to office to implement them.

Figure 2 illustrates the structure of political competition in the
1930s. Similar diagrams could
be composed for later periods.

Once policies are credible, additional forces come into play that further enhance their
stability.
People become willing to commit to investment programs. In particular, they become more
willing to make fixed and specific investments, the value of which may be contingent upon the
maintenance in place of the policy regime. And once they have done so, they then acquire a
vested
interest in the policy. Should the policy regime change, then those who have invested would face
a loss of value. Because the investments are of value in this use but of little value in any other,
those in the industry cannot readily employ the market to safeguard themselves. They cannot
exit;
rather, they must give voice (Hirschman 1970). They thus become a lobby in favor of the
policies.

When predictable and credible, the policy choices made by governments thus elicit the
formation of capital whose value is conditional upon the continuation of these policies. The
owners of the assets thus formed constitute a lobby on behalf of the of the policy regime. Should
political agents seek to deviate from their promises, they would them trigger "alarm
bells" (McCubbins and Schwartz 1987), or protests by organized interests. And those with
a vested interest in the industry would seek to punish them politically for their defection.

We can thus appreciate how political structures can generate a pattern of bias in policy
making, and thereby introduce political stability. We can see how patterns of choice become
self-enforcing, thereby institutionalizing policy choices.

The Power of Technocrats

It may be useful to apply this framework to a relevant problem: the role and the power of
technocrats. Qualitative evidence, at least, suggests that the reform of economic policies--the
reduction of budget deficits, the promotion of market forces, and so forth-- is accompanied by
the empowerment of technocrats and the depoliticization of economic policy making. By the
latter
is often meant the making of economic policies by independent agencies, such as a central bank,
within which economists debate and choose policies, free from interference b politicians, private
interests, or partisan political forces. The inference is therefore sometimes drawn that
"good
policy" results from powerful technocrats, who are disinterested and a-political and
positioned above the political fray.

In engaging such arguments, it is useful to recall that technocrats possess neither wealth nor
power. They merely posses PhD's. Noting that, we may assume that if technocrats possess
political clout, it is because they have been rendered powerful. That is, they have been found to
be
politically useful and placed in positions that impart influence to their policy preferences. The
depoliticization of economic policy making is itself a political act.

In keeping with the methodology outlines in this paper, we may best begin by considering
political preferences. This implies the initial recognition of the distributional component of
economic policy. In accord with their endowments and preferences, people will favor or oppose
policies that call for the stabilization of the economy, the liberalization of markets, and the
promotion of openness and trade. The adoption of such policies favors the interests of some
groups and, at least in the short run, hurts the interests of others. Insofar as economic technocrats
are able to implement such policies, then, it is because those who possess power find it not only
normatively desirable but also politically advantageous to empower them, so as better to ensure
the selection of such policies.

As we have seen, one way in which power can be created is by structuring the process by
which proposals become policies. Politicians can privilege the position of any group by injecting
its proposals into the appropriate place in the flow of decision-making. The chief executive is the
agenda setter; he controls the staff that structures the flow of policy papers and the deliberations
of cabinet committees. He can therefore privilege the position of technocrats by assuring that
their
viewpoints enters sequence of deliberations at the stage in which their viewpoints are most likely
to prevail. Under the oversight of a sophisticated agenda setter, the technocrats will appear
powerful because their policies so frequently prevail. But that success reflects the structuring of
the political process by their political patrons, rather then the power of the technocrats
themselves.

Another source of power is the capacity to veto. In the single dimensional issue space,
discussed above, the median voter occupied such a position; no coalition lacking that player
could
command a majority. If the chief executive organizes the flow of policy making such that the
ministry of finance or the central bank must sign off on proposal for it to become policy, then he
empowers those agencies. Nothing can go forward that they oppose; and those who seek to
advance their own proposals must incorporate the viewpoints of those agencies.

The question then arises: Why would the executive give powerful positions to technocrats or
chose to empower their agencies? The answer must be: because he finds the championing of
their
policies politically rewarding. This condition will hold so long as a constituency that benefits
from
the policies advocated by the technocrats mediates the political fortunes of the agenda setter. If
those who make, or break, his political prospects benefit from price stability, market-clearing
prices for capital and foreign exchange, and openness to international markets, then the
agenda-setter will structure the policy process so as to privilege the position of technocrats,
empower their agencies, and so institutionalize a pattern of bias in favor of "good"
economic policy.

Economic technocrats, we have noted, are merely PhD's. While they may lack wealth or
power, they do possess expertise. While unable to evaluate the technical abilities that they bring
to
bear upon the formulation of policies, a politician can monitor the impact of their policies upon
his
constituents. He will seek to augment, or diminish, the power of the technocrats, depending upon
the impact of their advice upon the welfare of his constituents, and thus upon his political
fortunes. Taking into account the visible impact of policies on his constituency, politicians
therefore chose whether or not to trust technocrats. And employing the same information, private
agents chose whether or not to lend credence to the pledges of political elites to adhere top the
technocrats prescriptions. Political accountability to a constituency than can penalize or reward
the political leadership thus underlies both the willingness to delegate power to the technocrats
and the effectiveness of economic polices.

Williamson, John, ed. 1997, The Political Economy of Economic Policy Reform,
Washinton D.C: The Institute for International Economics.

1See the discussion in Przeworski and Limongi (1997). See also the contributions
in
Haggard and Webb (1994).2See the contributions in Meier (1991).3Williamson (1997).4Hough and Fainsod (1976) and Roeder (1993).5See, for example, Bates and Collier (1991).6This is the major contribution of Shepsle. See Shepsle (1979); Shepsle and
Weingast (1981).7The phrase is taken from Schattschneider (1965).8This discussion is further elaborated in Bates et al. (1998) and (1997).9Periods of single or no-party rule provide a test of this argument. In those periods,
policy swung dramatically against the coffee growers. See Bates (1997).